A Tribute to the Thoughts of Another and his Friend"Everyone knows where we have been. Let's see where we are going!" -Another

Wednesday, August 14, 2013

My Candid View – Part 1

"Importing more than you export means lots of empty containers. That visual manifestation of our trade deficit is what drivers see as they pass the Port of New York and New Jersey on the New Jersey Turnpike. In the first eight months of 2010, the port saw the equivalent of 700,000 more full 20-foot containers enter than leave.

45% of containers exported from port operator APM Terminals’ Port Elizabeth facility (part of the Port of New York and New Jersey) are empty, a reflection of the trade imbalance."Source

_________

Ten days from now marks the 5-year anniversary of the day I started this little blog. On that day I had no idea where it would lead. All I knew was that I had stumbled upon a view very different from everything else I'd been reading, and yet I couldn't find anyone, anywhere on the various existing forums, who wanted to talk about it. Even its source, where I found it, the USAGold forum, had banned such discussions at least two years earlier and they even deleted my new "FOFOA" posting account when I tried to bring it up. So I started my own free "blogspot" and simply started talking to myself in an open public forum where others could join me if they found the discussion worthwhile.

Five years later and my blog has more than 400 posts, 52,000 comments (2,600 of which are mine), and more than 5 ½ million views. I guess that means a few people found the discussion worthwhile! ;D

I realize that I haven't been posting much lately, so to make up for that, and to celebrate the 5th anniversary of the blog, I'm going to put up a new one every day for the next ten days! I know that this will be way more than you want or need, but I'm sure that you'll survive the trauma of so many posts. ;D

Just because I've been quiet on the blog doesn't mean I haven't been busy explaining my view. Yes, there are, indeed, still people who want to know what I think. In fact, a producer from the cable news network RT America contacted me last month seeking an interview on the subject of my blog, Freegold. If I wasn't interested in being interviewed, she asked if I could recommend someone who would be. So I asked a couple of people who I thought would do well and Edwardo agreed to do it.

After Edwardo agreed to do the interview, I spent some time emailing with him, answering questions he had about my view on various topics. What I'm going to share with you over the next ten days are my emails, not only with Edwardo who I'll get to in a few days, but with six other people as well, all from the last 30 days or so.

This is my candid view as I explained it to a few of my top supporters who asked me for my thoughts. It will cover a whole host of subjects including hyperinflation, GOFO and backwardation, GLD, whether or not local coin shortages are related to tightness in the overall physical flow, discerning between the inevitable and the speculative, the past, present and future as I view it, gold mining in Freegold, the utter disconnect between the price of gold and the physical market today, the basic structure of the physical market and how its connection to the price will be reestablished, and even how I foresee the revaluation unfolding. It's more than 80 pages of mind-bending views, so just beware of the potential for exploding heads. ;D

Other than the obvious ones, all names will be redacted to protect the innocent and guilty alike, and also to save me from having to get permission from everyone to post these. The formatting will be simple:

If I include someone's email to me, it will be indented like this.

"And if I quote from someone's email within my reply, it will be italicized with quotation marks like this."

So without further ado, here you go:

Hello FOFOA,

I don't really want to ask this question on the public forum as it is an odd tangent my mind has traveled....so if you have time let me know your thoughts. You have probably addressed something similar to this a few times in various posts. You can point me towards them if you wish. If you haven't I'm sure your thoughts on the matter will help shape mine in a way that I feel more comfortable with.

My issue is with all the talk on the blog of Hyper-inflation in the US lately. My mind always starts wandering towards this being far less likely than many think. There are several factors that weigh in my mind, though my understanding is still very limited in my opinion. I'm the type of person that can't go on learning until a nagging question is answered.

So here are my thoughts. Though we (the US) are currently running a major trade deficit and fiscal deficit this seems a lot more like it is by choice and a lot less by necessity. I look at things like policing the world with our military, foreign aid, and not drilling for oil (at least not as much as we could) as big examples (but not the only ones) of a country that has a loose belt because it chooses to. Heck maybe it is even understood and requested by the rest of the world that we run major deficits on purpose to keep the global monetary system stable. Isn't this the Triffin dilemma at work? If foreign nations are aware of and believe in the Triffin dilemma then maybe they expect the United States to police the world, provide foreign aid, and not become a net exporter of goods. If we tighten our belt here at home the phone probably starts ringing off the hook from the ROW. Hasn't every global recession followed a US surplus or US economic slow down? Lets just zoom in on our military for a second. I think it is fair to say that most of what we value in this world depends on the continuous and affordable flow of oil. Houses, cars, businesses, stocks, etc. all require a world with oil flowing or their value would plummet. The key to keeping the oil flowing is gold flowing but wouldn't it also be security. What is the value of a safe world and the security that provides it? In other words how much is wealth/savings/gold worth in a war zone? Has the US not provided quite the service without payment in this regard?

If the above has any validity to it then we as a planet are all in this together. The US has just been playing its part and wouldn't deserve the pains of hyper-inflation. Anyone else in the same position would have enjoyed the privilege short term but would have also been forced to run a similar monetary policy long term. Wouldn't it be more equitable if in the interest of maintaining peace and harmony dollar based debts, especially US treasuries were never brought back to American shores to cause hot inflation but instead were replaced in value by gold. Simply cast aside as a remnant of an old monetary system and the measures taken to prop it up for so long? What financial asset does gold not have the power to pay in full at the right price. Why not make the world whole again with a little gold rather than punish the nation and its people in charge of a flawed system. As it is in this life I expect there will have to be some winners and losers and the winners will be those with systemic value and the shrimps that followed in their footsteps.

But I really think once a new system is in place the US government will not have as much trouble scaling itself back as it has for the last century. Most people would think that is a crazy thought but so is hyper-inflation and 55k gold in some circles =D. I think given a little time to adjust to a new system (minus punitive hyper-inflation) the american public can manufacture, export, become energy independent, and balance its trade deficit. With no more global obligations and a need for foreign oil do you see this as possible. Have I wandered so far off the trail I've fallen into a nearby stream? Throw me a rope!

-XXX

Hello XXX,

Indeed, the ROW is paying for 'Team America-World Police' with real goods and services! And yes, some portion of the world is very happy with this arrangement, although upon closer inspection I think that you'll find the biggest supporters are no longer the ones paying for it in real terms.

Shift your perspective a little. You said it seems like the USG budget deficit is high by choice. In other words, we raised it to its current levels voluntarily. But a budget deficit simply means spending in excess of income from taxes. So perhaps taxes simply haven't kept up with spending. This is normal, natural, since taxing is more politically taxing than borrowing. So did we raise our budget deficit voluntarily, or because the world demanded our 'World Police' services? Or was it simply the natural progression of an unconstrained large central government?

You said it seems like our trade deficit is where it is because, perhaps, the world demands that we run a trade deficit. This is Triffin's dilemma, and perhaps the world is fine with it. But even if it wasn't, it seems that the deficit is voluntarily large, and could be contracted. But here's the thing. The US private sector already contracted its portion of the trade deficit. If you only look at the US private sector, we are now essentially running an austere surplus against the USG and the ROW combined. The USG is running a deficit against the US private sector and the ROW combined. So the trade deficit is now entirely attributable to the excessive spending of the USG.

If the world demanded this, then there would be no QE. QE is the clearest sign that we are running a trade deficit that is no longer supported by the ROW. QE is the evidence that the ROW has essentially pulled the plug and is fine if the USD collapses, because if they were still lending all excess dollars back to the USG, then foreign purchases of new-issue Treasuries would match the trade deficit. QE is evidence that our trading partners are now spending some of those surplus dollars on foreign goods and services rather than lending them to Uncle Sam. And it is also evidence that Uncle Sam will not cut his intake of foreign goods and services even though this is happening.

If hyperinflation was a decision to be made by the ROW to punish the US, then that decision has already been made. But hyperinflation is not a punishment. It is simply the only way this can end. Hyperinflation will wipe away Uncle Sam's debt. How is that bad for Uncle Sam? Yes, it will reduce the trade deficit to zero in real terms even as it skyrockets to infinity in nominal terms, but that process is already underway since the ROW is already spending some of those surplus dollars rather than lending them back to the USG. The ROW is already using some of those dollars to bid against Uncle Sam who is continuing to print new ones to bid back. It is a bidding war that is in its early stages, and will grow slowly at first, then all at once.

So think about hyperinflation in terms of the trade deficit, which is now entirely attributable to the USG's deficit spending. Forget about what is right and wrong, deserved or undeserved. Just think about how it will look. Visualize the trade deficit in both real terms (# of containers coming in full and leaving empty) and in nominal terms (the $ number reported by the BEA). In real terms, it will decline from its current number of containers to zero. At the very same time, it will grow nominally from $500B/year to nearly infinity. So that very last single container that comes in full and leaves empty may cost hundreds of trillions of dollars, making the trade deficit nominally hundreds of trillions of dollars, even as it approaches zero in real terms. But the USG will still want and need that last container. It won't give it up just to save the value of a dollar.

You seem to think that the ROW has been supporting this situation because, perhaps, it wants and appreciates those "World Police" services. But what we learned from Another was that the ROW actually had another reason to support the US deficit. And that reason was to buy time to build an alternative monetary system. And once again I'll point out that, yes, some portion of the world does appreciate our services. To some extent, Europe does, especially since they stopped paying for it at the turn of the century. So now it's a freebie to them. Australia loves it. NZ loves it. Canada loves it. Japan loves it. The UK loves it. All of the dollar faction loves it, but they aren't the ones paying for it in real terms. For the last decade that's been mostly China paying for it. But even that support seems to be waning.

Oh my, look at this! Are the World Police preparing for to arrest their sponsor? Hmm…

All I'm saying is that hyperinflation is not a punishment, and even if it was, it has already been decided and delivered. What we're watching right now is just how slowly it plays out before it undergoes a phase transition and then happens all at once.

They weren't supporting us because they like us. They were supporting us because they got something out of it. That doesn't mean everybody doesn't like us, but look closely at who supported us versus who likes us, and also why they supported us. From 1979-1999 it was Europe. And it was to buy time for the euro, not because they liked our military. Yes, in 1922 it was because they liked our economic stability. And in 1944 it was because we won WWII. But in 1979 it was to buy time to build the euro.

The dollar will end because the perpetual trade deficit will end. The world is in the midst of an economic contraction right now and the USG is a giant drain on the supply of real global resources. QE is the way the USG keeps draining even as the ROW begins to resist. It's been happening now since 2009.

The USG will never voluntarily give up those full shipping containers it needs. And it certainly won't give them up voluntarily before the phase transition from slow to fast begins, and by that point, it will be too late. It will become a matter of national security to unleash the full power of the Ball of Twine Executive Order. And matters of national security will always trump the urge to protect the purchasing power of savers and foreign CBs holding US debt.

The US dollar must devalue at some point. And when it does, it comes down to how the USG will react. Will it favor national security, or the purchasing power of savers holding its debt? And remember, those who will make that decision will also be deciding on their own personal paychecks in the process. To favor national security will mean to index their ongoing pay to inflation. To favor the savers and foreign CBs holding US debt will be to selflessly agree to working for free. I think the outcome of such discussions is quite certain. So while it may be technically possible for the USG to avoid hyperinflation, I think that once you figure in the human factor, it becomes impossible.

Sincerely,
FOFOA

Hello XXX,

"I’m just trying to reconcile it all with things that don’t make as much sense to me."

I'm not really seeing what doesn't make sense to you, except that you seem to think that hyperinflation is something that will be worth avoiding when the time comes. I don't think it is, or will be. Why don't you ask yourself why you think bright minds would be plotting how to avoid it, what they would actually be avoiding, and what benefits they would be giving up in order to avoid those things that you think make hyperinflation worth avoiding.

Let's see, we can expect some supply line disruptions which may lead to public riots. Governments traditionally address those things with capital controls and more printing to buy up the goods and the supply lines to quell the riots. Would they foresee this and give up something else much earlier just to avoid this potential difficulty? I don’t think so. More likely they would make preparations like that Executive Order which gives them the power to do exactly what I expect them to do. Now that's preparation!

We can expect some economic hardship in the US, but in general we are already there. I think the US economy will explode like a fertile ecosystem in the wake of a dollar hyperinflation, so there's really nothing to be avoided on that front. I actually look forward to hyperinflation!

In fact, lately I've caught myself on a number of occasions, while watching TV shows with my wife, when she says, "that's so disturbing. What's wrong with people? Boy, our country sure is messed up." Then I say, "you know what will solve that problem? Hyperinflation!"

Look at most of the political problems we face today, almost all of which seem politically unsolvable. I find myself more and more thinking about how dollar hyperinflation will solve nearly all of them by putting us back on a foundation of reality rather than a foundation based on flawed perspectives.

On one side of the aisle, the driving foundation is that we have the magical dollar and we should use it to spend spend spend which creates a trough from which pigs of all colors will come to feast for free. And on the other side we have the fallacious argument that this is strapping our future generations with an untenable bill. Yes, these flawed arguments tend to keep each side somewhat in check, but they are both fundamentally wrong. And hyperinflation will clear the slate and wake everyone up on both sides. The untenable bill will not be paid by future generations. It will be paid today by foreign CBs and savers holding dollar debt as their savings. Is that something you think they will go to extraordinary lengths to prevent even as no one is considering it as a possibility?

In fact, even though the CBs holding US debt will pay some of the bill, they will be compensated for that cost through the revaluation of their gold. So the only ones who will pay this bill are the savers holding dollar debt as their savings with no physical gold hedge. Think about that.

"My understanding is that as long as US dollars go into treasuries or financials they don’t affect the physical plane and we don’t see price inflation domestically."

Well, dollars don't actually go into Treasuries and financials, they flow through them to the seller who then spends the money in the physical plane. Someone always spends the money in the physical plane. The difference is that the USG will spend the money whether they get it or not. If you, as a net-producer/saver, buy Treasuries or financials, you are giving your money to someone else to spend, so there's no net-increase in spending. Likewise, even if you buy gold, you are giving your money to someone else to spend, so there is no net-increase in spending. When the private sector increases spending through credit expansion, it must then work it off in real terms. So private sector credit expansionary forces are generally offset by credit contractionary forces from past credit being paid down. The USG, on the other hand, is the one entity that can actually increase spending in isolation by printing in the case that someone doesn't give it the dollars it needs to spend.

The difference between buying financials and buying gold is that, when you buy financials you are giving your money to someone to spend who has not yet earned it in the physical plane. They have not produced in the past for that purchasing power. They are pulling that purchasing power in from the future. But if you buy gold, you are giving your money to someone to spend who has earned it in the past. They have already produced something to acquire that purchasing power. In other words, by buying financials you are, in essence, contributing to the lowering of lending standards which leads to asset bubbles (financials that are priced higher than their true value based on the counterparty's true ability to perform in the future as indicated).

When you buy Treasuries, you are simply enabling the USG to spend without taxing or printing. You are not lowering lending standards because the USG is going to spend that money regardless of whether or not you lend it to them. They'll just print it up if you don't. But over time, this enabling will grow the USG to an unsustainable size as it always expands itself and never contracts. Did you know that government employees have the best job security of anyone? They can't be fired for poor performance, so they don't even try to perform well. Government expands, it doesn't contract, as long as it is enabled.

What you are saying with your statement above is mostly correct. When the trade deficit was greater than the USG budget deficit, the difference was attributable to the US private sector. And that portion of foreign surplus dollars went into financials like mortgage backed securities, which fed back into the housing bubble. When that popped, the private sector trade deficit contracted immediately because, unlike the USG, the private sector can't print its own money.

Remember that hyperinflation is not normal inflation where we have bubbles and cycles that swell and contract the economy changing prices. Hyperinflation is the collapse of the currency itself, and that's why we are here now. It's all about the USG and the Treasuries. So what if all of those excess foreign dollars go into the NYSE or to buy up private assets inside the US? What does that do for the USG? The Fed still has to QE for the USG. All that does is drive up the prices of whatever they are buying and then the money gets spent either by whomever sold them the asset or by a private borrower. This affects normal inflation but is not a catalyst for hyperinflation.

Hyperinflation, IMO, is going to come from the USG spending on foreign goods. It will be driven by a price rise in those goods which the USG will meet with enough dollars to still get them no matter what the price is. This will be the feedback loop. It could be initiated slowly by a gradual rise in commodity prices, or quickly by a jump in prices due to a sudden dollar devaluation. If prices never rise, or if the dollar never devalues, then the USG can spend anything it wants and the trade deficit can continue forever. How likely is that? We know why it has continued so far. So what reasoning can you offer for how it will continue from here on out? I can't offer any, therefore something must change, and the only outcome I see is dollar hyperinflation.

"Though some actual belt tightening would be in order could hyper-inflation be avoided with a future balanced budget by a USG that now only looks out for US citizens?"

What do you think belt tightening means? It means the government giving up something voluntarily (as opposed to being forced to). When have you ever seen them do this? And to avoid hyperinflation in advance? Can you show me one politician who even has hyperinflation on his or her radar? I'll tell you, XXXXXXXXX spends a lot of money on political contributions and travels to meet many politicians at meetings and in person. For years now he has been asking them privately about hyperinflation or the collapse of the dollar as a potential scenario they should be considering and not a single one even considers it a possibility. He's been known to donate $1,000 to $2,500 to a politician and travel to other cities just to meet them in person, and I believe XXXX XXXX was one of them. Then he reports back to me what they said. So who in government is going to voluntarily give something up in advance to avoid something that's not even on their radar? And how would they get anyone else to go along with it without first putting it on their radar?

And again, once it becomes painfully obvious that hyperinflation is a reality, it's too late. At that point it boils down to national defense/security versus working for free to save the purchasing power of those who saved in your ridiculous paper promises. It's really that simple. They will print. Bet on it! IMO, of course. ;D

"But I do wonder if there will be something worked out as an alternative to hyper-inflation of the US dollar."

By whom, and what would that be? And what would they be avoiding by preventing hyperinflation? And what benefits from hyperinflation would they be giving up by preventing hyperinflation? I can't see it at all. In fact, I see the exact opposite. I see that those who have hyperinflation on their radar (like me) must understand its benefits and welcome it. And those who don't will naturally drive it all the way to Weimardom once it reaches their radar. To imagine it is something to be avoided and therefore to think that someone somewhere must be planning to avoid it, somehow, some way, feels a bit superstitious to me.

"I remain curious to see if an unforeseen creative alternative has been put together to save the US dollar from complete obliteration."

Like what? See? That's what I mean by superstitious! ;D

Sincerely,
FOFOA

wow...hyperinflation is not worth avoiding. Never thought about it that way. In that case there isn't really a need for a super secret deal to help the US avoid it. I think your hyper-inflation series was one of the first posts I ever read on your blog. I had a lot of baggage and no understanding of freegold at the time. Though I knew I had stumbled upon something great, I think I was just looking to confirm what I already "knew" rather than learn something new. I think I really need to go back and re-read those posts with the understanding I now have. It never occurred to me that hyper-inflation would solve problems. Yes I figured some debts would be easily paid but I saw that as hardly worth the trade offs. I pictured chaos and disorder. Empty grocery shelves and broken glass in the streets. I guess I never really thought about what happened after the initial problems. That these unsolvable problems we face today would go away. I really appreciate your responses. It seems I have some homework to do.

Well it probably won't be peaches and cream, but I also don't think it will last very long. 6 months would be my best guess, but it could even be as short as 3 months or less for the chaotic part. And yes, it wipes the slate clean and returns us to a reality-based existence, where the trough of free stuff is no longer full for the taking. Socialized healthcare will have to be actually paid for in real terms and will therefore be reconsidered. Illegal (im)migration will become an outflow problem rather than an inflow one. Military and government departments will have to be downsized. Unsustainable entitlement programs will all have to be reconstructed from scratch since they will be wiped out in real terms. Nominal entitlements will be erased, but that doesn't mean we will let the most-vulnerable die in the streets. Instead, they will be reconstructed based on the reality of the government's income from taxes, rather than from taxes, borrowing and printing combined. The entire tax system will have to be reassessed. We will be back to reality! I imagine it will be quite messy, but WTF is it now? I look forward to hyperinflation!

haha...you never cease to amaze. I can’t believe I am going to agree that hyper-inflation is a good thing for (parts of) society and the government at the same time. Sometimes I wonder if you are just some genius that enjoys taking the opposite side of the argument presented by the rest of the world on various issues and then just out debate them all. I kid of course…..I think

Also, I just re-watched your debrief with Aquilus. He brought up a question that you helped him with via e-mail but didn’t reveal the answer as clearly as he did the question. It had to do with the Fed just printing money to buy treasuries. Now before you give me the answer I want to take a shot at it. I’m trying to train my mind to never forget that currency passes through things. Also I think I need to brush up on my understanding of “base money” so if you can point me to a post I would appreciate it. So anyway the buying of treasuries isn’t what keeps inflation from hitting the US at the physical plane it’s that instead of those physical dollars eventually biding for goods and services they are lent back to the USG to be spent again on someone else’s goods and services. Other countries have allowed us to have a net amount of their stuff in exchange for currency that they then lend back to us so that we can buy more of their stuff next month. So if countries wanted to dump their treasuries it wouldn’t matter who bought them. What would matter is if the entity selling the treasuries wanted to bid with dollars to buy things in the physical plane. In fact the problem is so huge that just the act of not loaning us back our own currency “like what is happening now” is enough to start the wheels of hot inflation.

Hello XXX,

Base money is easy. It's not really part of "the circulating money supply" except when it is inside someone's wallet (ie. outside of a bank or ATM machine). Base money is simply bank reserves aka central bank liabilities. "The circulating money supply" is made up of all credit money plus the cash that individuals have taken out of the bank.

When anyone other than the Fed buys Treasuries, they lend part of the existing circulating money supply to the USG, so there is no increase in the circulating money supply. When the Fed buys Treasuries, they increase the circulating money supply. But notice that the Fed simply created base money, not credit money, and I said that base money is not part of "the circulating money supply", right? So who created new money supply? The answer is that the USG did when it spent the money it received by selling Treasuries to the Fed. So the Fed created new base money and the USG created new credit money when it spent it, and the credit money is what increased the circulating money supply, not the base money which we see as "excess reserves held at the Fed."

The standard (and the MMT) argument for why QE is not inflationary is that they point to these excess reserves and say, "look, they're just sitting there piling up. No one is spending them so it's not inflationary, it's just an asset swap between the primary dealer banks and the Fed. They are swapping one asset, Treasuries, for another asset, base money, which just sits there like the Treasury otherwise would have, so there's no need to be concerned." But the flaw in this reasoning, what they miss, is that newly issued Treasuries directly represent USG spending.

When the USG spends, it credits someone's private account at some bank. That credit either came from someone other than the Fed who bought a Treasury, or it came from someone who paid their taxes, or it was created from thin air by the simple act of the USG writing a check. It is the latter that is inflationary because it increased the circulating money supply. The first two options do not increase the circulating money supply because a credit money unit simply passes through the USG, from either a lender or a taxpayer. In the third option, the Fed enabled the USG to create brand new credit money by issuing a new base money unit to go with it. The base money unit goes to the commercial bank that took the check issued by the USG. It goes into that bank's reserves while the bank issues a new liability to the government stooge that got paid.

When a commercial bank takes a deposit, that deposit becomes a liability to the bank. So the bank has to receive something in return for expanding its liabilities. In this case there is no credit money unit coming from a lender or taxpayer, so the stooge's deposit is a brand new liability in the commercial banking system. It is created by the simple act of the USG spending a credit unit without taking one in. But the commercial bank is fine with creating this new liability because it got a new reserve unit to go with it. And it's those reserve units we see piling up in the excess reserves held at the Fed.

Now what was the specific question you were trying to answer?

Sincerely,
FOFOA

you answered my specific question and about 7 others after I read and re-read your reply about 6 times. I think I only have a few left. #1) Why do they call it excess reserves held at the FED? Isn't it held at the commercial bank that has the liability? #2) These reserves could be withdrawn as cash so why do the MMO folks consider it just like a treasury that just sits there. Once and if it is withdrawn it adds to the money supply correct? #3) Isn't the money supply expanded and contracted all the time with the act of lending and defaulting? Is governments expansion via selling treasuries to the FED and spending abroad that much more inflationary than say the housing boom of the early 2000's? Regarding question #3 I have heard from mainstreamer sources from time to time explain that the government is stepping in to fill the void in the "shrinking" money supply so that we don't experience a deflationary depression (how benevolent of them) via the recent increases they have made in borrowing and spending. #4) The money supply is already so huge why didn't we hyper-inflate in the physical plane decades ago? I thought it was because foreign nations sopped up all the excess dollars and held them as reserves of their own? If this is the case then the act of increasing the money supply by selling treasuries to the FED isn't directly inflationary as much as the act of foreigners deciding not to hold these ever expanding dollars anymore right. I guess one can lead to the other but I'm trying to understand the direct causes of inflation not the indirect ones. If foreigners decided to stop holding excess dollars as reserves during the housing boom by my logic hyper-inflation would have ensued just as easily without government ever spending money it received by selling treasuries to the FED.

Hello XXX,

"#1) Why do they call it excess reserves held at the FED? Isn't it held at the commercial bank that has the liability?"

Reserves held at the commercial bank are physical cash either in the vault, the cashier drawers or the ATM machines. Reserves held at the Fed are electronic central bank liabilities accounted for through bookkeeping.

"#2) These reserves could be withdrawn as cash so why do the MMT folks consider it just like a treasury that just sits there. Once and if it is withdrawn it adds to the money supply correct?"

These are "excess reserves" so they are above and beyond the amount of reserves required for a bank to hold against its liabilities. That means that, under normal circumstances, it is highly unlikely they will ever need them in physical cash that can be withdrawn. Banks don't make money holding reserves, which is why they try to hold the minimum amount required. This is why the Fed is paying them 0.25% for sitting on these excess reserves.

When you withdraw cash from the bank, do you add to the money supply? No. You cancel the bank's liability to you in exchange for something physical—cash. So the answer to the second part of your question is no, the printing and physical withdrawal of those excess reserves would not add to the money supply.

"#3) Isn't the money supply expanded and contracted all the time with the act of lending and defaulting?"

Yes, but more so with the act of borrowing and then paying down the debt. Most people don't default.

"Is governments expansion via selling treasuries to the FED and spending abroad that much more inflationary than say the housing boom of the early 2000's?"

"Regarding question #3 I have heard from mainstreamer sources from time to time explain that the government is stepping in to fill the void in the "shrinking" money supply so that we don't experience a deflationary depression (how benevolent of them) via the recent increases they have made in borrowing and spending."

Yes, that's part of the mainstream argument. They look at the credit contraction and call it deflationary. It is, but the main difference between a deflationary depression and hyperinflation is a government stepping in "to fill the void."

"#4) The money supply is already so huge why didn't we hyper-inflate in the physical plane decades ago? I thought it was because foreign nations sopped up all the excess dollars and held them as reserves of their own? If this is the case then the act of increasing the money supply by selling treasuries to the FED isn't directly inflationary as much as the act of foreigners deciding not to hold these ever expanding dollars anymore right."

Just because I'm explaining how and why the dollar currency is going to collapse this time doesn't mean that's the only way it could have collapsed. It almost collapsed in 1979 under different circumstances. Do you get that? They saved the day by supporting USG's debt habit and figuring out a temporary fix for the physical gold flow problem.

"I guess one can lead to the other but I'm trying to understand the direct causes of inflation not the indirect ones."

Inflation can be caused in two ways: supply and demand. This is, of course, relative to any changes on the physical side of the equation. If the relative supply of money is increased – inflation. If the relative demand for money (as a SOV) is decreased (which is the same as velocity increasing) – inflation. Deflation is the relative inverse. Currency collapse (hyperinflation) is more of a build-up and then explosive release of pressure followed by the government's response.

"If foreigners decided to stop holding excess dollars as reserves during the housing boom by my logic hyper-inflation would have ensued just as easily without government ever spending money it received by selling treasuries to the FED."

Foreigners buying US private sector debt probably caused or at least contributed to the housing bubble. When the housing bubble collapsed, the foreigners didn't buy any more MBS, it all went into USG Treasuries at that point.

BTW, the Fed helped get the "official" foreigners (CBs) out of MBS (but not the private pension funds) after the housing bubble collapsed.

Sincerely,
FOFOA

ok I think you nailed everything and I do see how it all ties together now. You had one intriguing comment at the end though:

"BTW, the Fed helped get the "official" foreigners (CBs) out of MBS (but not the private pension funds) after the housing bubble collapsed."
I think I know why they did that but I don't want to assume anything. Was it because they only helped those they needed and they didn't need anyone that was no longer providing structural support. Attempt to damage the economy and reputation of a competing currency zone. I faintly remember news reports that certain bailout money went to say....banks in France, ect. Never really understood it except that it built upon my flawed theory that we were "all in this together" and the US was bailing out the world because that was their role as the reserve currency.

"Was it because they only helped those they needed and they didn't need anyone that was no longer providing structural support."

This. The CBs shifted back over from MBS & Treasuries to only Treasuries.

Before the housing collapse, the US trade deficit was larger than the USG's budget deficit, so some portion of the trade deficit was attributable to the US private sector and the rest was attributable to the US public sector (the USG). All of the surplus money from the trade deficit could not have gone into new-issue Treasuries because the USG simply wasn't issuing enough of them (i.e., the budget deficit was smaller than the current account deficit so there were more homeless dollars than there were new Treasuries). So the remainder went into "the next best thing" which at that time was private sector MBS. This was probably part of the feedback loop that drove the housing bubble to its top, where it popped.

And now imagine that the PBoC was buying gold instead of MBS. Obviously there would have been less MBS created, so the excess that drove the housing bubble was not a lack of bank regulation, but it was the demand for more debt coming from the PBoC (among others) which, in this case, was the monetary equivalent of a "saver".

"…That's right, I saved the "crazy super-hyperinflation talk" for the tail end of a really long post. Because A) people who think they have it all figured out already tend to abandon a post once they read the word "hyperinflation", and B) the stuff in this post really happened and is still happening so it's only fair to you, the reader, to give its inevitable denouement the appropriate weight of a bold conclusion. If I didn't do that, I would not have done my job, now would I? ;)"

I do however have two conditions. The first is that such critique is valid and stands up to scrutiny. The second being that such critique or views must be original, and not things that have been considered here before spouted by some new person.

People such as spaul seems to be under the impression that we here are morons and he needs to educate us as to his enlightened views. He seems to attach too much significance to his own meagre thought and almost none to the thoughts of those that came before him here.

Fact is that nothing he has said thus far has been new, or interesting. We have covered this ground, many times.

In that context, given that others have tried to politely point him and others with the same mindset in the direction of discussions held on those topics, and given his apparent disdain in considering or even reading such, the irritation shown by some members of the board does merit understanding.

I think you do have a point that we have become somewhat echo-chambery and I think we as a community need to be on constant guard against that, as such a mindset precludes one from seeing new and original critiques that may come in future.

I would ask everyone to keep this in mind and keep an open mind, with the hope that some valid critique can be found.

In my view it should always be our goal to disprove the FG thesis, and this has been my goal from the outset, though I must admit I failed horribly, though am glad for it.

I think part of the reason we seem echo-chambery is because those that have spent the time, have been personally unable to disprove the thesis, and not found any other comments by others doing so either.

A vacuum of valid critique may look like an echo chamber, but it is in fact something else.

As backwardation is in a permanent retrenchment, your posting plan seems more like a countdown to what we have been patiently waiting for.

I especially liked:

"In fact, even though the CBs holding US debt will pay some of the bill, they will be compensated for that cost through the revaluation of their gold. So the only ones who will pay this bill are the savers holding dollar debt as their savings with no physical gold hedge. Think about that."

This has been the point all along hasn't it? And recent events do seem to validate all past posts leading up to the "countdown".

I didn't get to completely finish this post, as the hamster wheel awaits, and ... this week, fingers crossed, I become a grandfather, so off I go to help out, as best I can ....

We watch the unfolding of time together (me, myself and the flower) as past becomes present and all predictions become reality.

Personally, I will be "stocking up" on more than just popcorn and butter, but let us hope the fireworks can be contained to that which we can enjoy as a true, new Independence Day unfolds.

excellent post, looking forward to the onslaught to come!Wil the pot smoking grand dad. I have a mental picture of a California hipster passing a (soon to be legal everywhere) pipe with the progeny.My oldest daughter has decided to do (more than) her part in maintaining the population. Grand child number six is due next month. good luck Wil.

I am especially pleased that someone else sees salvation in hyperinflation. I have often felt reluctant to voice this belief because of the baggage that comes with a full on, balls to the wall hyperinflation. I do exactly as FOFOA does when I see something absurd or ridiculous on the TV or out in public. I say the particular activity is not long for this world and will be corrected in due time by a hyperinflation.

5 years reading this blog leaves a mark.

RTFB. Then RRTFB. My contribution is inbound. If you are reading this blog, and if what you read here has value, please consider a donation to our host.

"But still this analysis makes you think what is the point of the big four US bullion banks to go long COMEX futures if they would be ultimately cashed out say at 300 $ POG? "

Taking delivery? JPM was called a Gold hoarder, hmm, should we welcome them!? Altough I wouldn't be surprised, and soon you might hear the same from Goldman or should I say Aluminium Sachs (sticking out tongue emoticon).

But LBMA is not Comix, so what do we really know? And I do not know much about details in the paper machinations. Respectively, how exactly the reval process is being carved in stone behind the scenes, at this point in time. (if it is...). Specs do have short time spans, if there's a small play possible they will do it. It can still be sold down within days, imagine a couple of days more of the April massacre....

Or is volatility saving it as Bright thinks?

But somehow my gut says the same as Michael dV, the damage is done! Tradition has it that after Checkmate, the game is started anew. Only that the King is made of pure Gold this time...

@Dante_Eu, you've got a fine taste man ;-), here's Another one on the theme (and thanks for bringing me back intense nostalgia on that (unfortunately) only CD from Underneath What! Used to listen to their Bad Karma Chameleon etc. ... until my head exploded)

In true Chinese fashion, they are looking to buy up in bulk. “I have people calling and saying, ‘I’m serious -- I wanna buy 100, 200 properties,’” Chen said in the report, adding that another colleague had just sold 30 properties to a single Chinese buyer.

A creative way to exchange heaps of USD for real stuff, rather than even moar treasuries?

@FOFOAA timely post as numerous members are starting to get discouraged and worn down by the long grind to transition; just as I predicted not so long ago. It is tough for most of our Fast food generation to stay the course; even as their very survival depends on it. Humans are a funny species... Will be reading with great interest.

@MFNice. I am heading to the sound for kayaking and will reply upon return; assuming an Orca does not mistake me for a meal. ;-)

The USG is running a deficit against the US private sector and the ROW combined. So the trade deficit is now entirely attributable to the excessive spending of the USG.

Thanks American private sector and ROW for holding up the heavy (physical) ass of USG! Can you please stop doing that so we can get it over with already?

In fact, even though the CBs holding US debt will pay some of the bill, they will be compensated for that cost through the revaluation of their gold. So the only ones who will pay this bill are the savers holding dollar debt as their savings with no physical gold hedge. Think about that.

Thanks from the bottom of my heart to thickskulled debt holders without gold everywhere for picking up this bill! Thanks for never exchanging your "signatures on paper" for something real, even after the 2008 financial shock!!! Me and my shrimp friends here at FOFOA's have enjoyed your abstinence from physical stuff tremendously, as it has facilitated huge supply available to us at low prices in the intermittent period!

haven't read the post yet because I am at work but I had to come to the bottom and comment. 10 posts for 10 days! Yay! Best gold analysis on the web without a doubt and you don't even charge for it! Time to hit the donate button.

" It could be initiated slowly by a gradual rise in commodity prices, or quickly by a jump in prices due to a sudden dollar devaluation."

My gut tells me it is the latter. I'm not sure I could explain it rationally but it just does not seem the world would tolerate a long slow rise in prices as the US continues its free consumption. I realize most of the world does not look at things this way but with the withdrawal of support for gold I think that certain important people have decided it is time.When the effect of that decision is felt I think it will be almost instantaneous.

I hope a lot of folks, folks who may not have demonstrated their appreciation, except in words, will provide you with something tangible in appreciation for what you've done in this post and what you are going to do over the next little while.

Song request for one of the next 10 days. The official Team America World Police song. EEExpriv FF yeah !

Anyway... One thing I had to wonder a bit about was the part of the post where FOFOA is saying that the private sector in the US and Im assuming he means the dollar bloc too, is baring the brunt of the contraction since 2008. I just thought there would be more evidence of this in the real economy. We all know that stock prices mean nothing but why are so many corporations still making good profits ? And why is there so few bankruptcies in the private sector ? Sure we get one big one a year maybe but that's normal. The banks are even managing to get some air back into the housing market...

Excellent post FOFOA, thanks. This 10 post series comes at a great time since I started my vacation Monday. Not going anywhere by having spent too much on the precious but will hit the jar surely soon.

I liked specifically the image of countries supporting the Treasuries and not having gold, I will make a list, just for fun. Right now, Japan seems to be winning the looser category...

Hyper inflation will only help the government and anyone that owns tangible assets, all else will become impoverished. It certainly will not help the overall economy as it is yet another financial state that results in capital misallocation. Everyone is buying land, art, surplus carpet, furniture, ANYTHING that can be sold later to some one in an effort to try to save purchasing power. This is not conducive to economic growth or anything like a healthy economy, just a different kind of sick. Yes they could, and some will buy Gold, but those that are late to the party will buy anything they can get their hands on. I'm not saying that this isn't what the will do, only that it is not any kind of salvation for anyone other than folks who own gold, or are already indebted and don't lose a job, so that they can pay off their debt in inflated dollars.

KnallGold you wrote ..'Taking delivery? JPM was called a Gold hoarder'Really are the 200 ?? tonnes of CONMEX/COMIX/LOL gold that important? Is this all a continuation of the paper games JPM plays.My take is that this will continue to be a paper game only, a short squeeze out of currency for the dumb suckers on the other end of the trade and it will not be a way to acquire physical gold. The paper gains will be needed to cover other paper losses for the crime league and perhaps to cash out gold 'depositors'/'holders' in other OTC markets.

@MFA wonderful day. I believe most here have an open mind but something funny happens when, and I'm almost afraid to say it, *gulp* silver enters the discussion (though this applies to any other 'tangible' put forth). Sure, this blog and its forefathers focus on gold as THE last man standing. And I concur. However, I am also willing to entertain viewpoints that would allow me to benefit for the purpose of collecting MORE gold prior to reset.

Now, you and the esteemed gallery may point to other sources for that purpose, but I would counter that it is already difficult enough just to try and keep up with the wealth of information here to then scour other sites for those 'pearls' (though I am grateful for a link or snippet).

The FG thesis has held up well to this point and, based on the significant contributions of our host and community, can be readily summarized for newcomers (no small feat). Now, I believe, we are hunting the elusive canary and the opportunity to collect MORE gold prior to the canary being found and forthwith incinerated. And that's why I consider those alternate views valuable, even if I don't necessarily agree. And those that are truly outrageous are easy for me to pass by.

Very good post indeed !Yes, there were political reasons behind the Exorbitant privilege. But the political context is now completely gone, which means that the privilege will be abolished. The world needs a normal Uncle SAM, not a Uncle SAM on steroids. ROW does not love or hate Uncle SAM, it just observe the usefulness of the USA actions. And a trade deficit in perpetuity is of no use for ROW, not even to US.

If I may rephrase what you are saying. You are willing to entertain trading ideas that will provide a return higher than gold, so as to acquire more, assuming that in the period of your trading the market structure does not collapse.

Since this blog focuses specifically on savings, you will be forced to go elsewhere if you are interested in trading ideas.

Furthermore, since we think the timing of this transition is unpredictable, but could well happen any day, including today, we tend to eschew trading to mitigate taking such risk.

I am sorry if you feel this blog should be about trading too, since you have difficulty keeping up with multiple sources of information or perspectives, but that is just too bad. It isn't.

There are many sites out there which focus on trading. If that is your aim, I am sure you will find one to suit your purposes, and best of luck with the gamble.

And here came my disagreements:a) you are under belief that the moment USD would become a reasonable currency, the economy of US will boost. I think this is wrong. The past success of US was driven by huge intellectual resources drained from Europe (emigration), from huge natural resources available (lumber, plow land, gold and oil) and from the fair political system in US compared to the ROW. Most of this circumstances are substantially over now;b)I have some issues with hyperinflation definition. If by hyperinflation you understand debasement of the currency and adjustment of purchasing power US citizens, this happens and will happen necessarily. None of the less, hyperinflation is seen as a spiral of price increases, this will not happen. Nobody can control this, once the genie is out of the bottle;c) US means secure trading routes (maritime mainly), means the IMF$ (that still has lots of merits, it's the backbone of credit system) and means the US consumer, that keeps China productive and Germany employed. Nobody wants those out, but nobody is willing to sponsor Captain America. Something is probably negotiated behind the closed doors. It is nothing about love or hate, it is the undeniable increase in wealth in the last two decades and it is about financing efficiently and sustainbable the infrastructure that made it happen

We have an odd situation now: the original capitalism brought to existence the specialized producer, that was a bigger and bigger consumer in the same time. THAT kept the ball spinning. Now we face a nation of consumers with little to none producers (US), a nation with producers but with no consumers (China) and probably the largest economic bloc, the EU, that kicks both producers and consumers (thorough unleashed taxation and chaotic public spent).

a) I am in full agreement on meritocracy, but this was only one of the ingredients. I am pointing out circumstances that I BELIEVE had a significant contribution AS WELL. If I get it right, there is discussed about a VERY BIG increase in US economy Post Free Gold, in the current conditions of a productive and modernized China and of a conflict free Europe.

b) I fully respect you and all the contributors of this blog. None of the less did you personally experienced HI ? Did you protected your hard earned money against value loss?

Again, I do not pretend to know the future-it is just MHO.

Thanks for your answer - I hope that you value a decent argumentation.

a) If the EU exports toward US will fall drastically, the China exports toward EU will fall either and China knows. They are the ultimate exporters, they are interested to keep the ball rolling, but in a more fair way.

b) the point is not if NSd is keynesian or not, but how the great decision and policy makers think - do you believe they are Keynes or Hayek ? What is wildly discussed on TV, how are the top notch advisers, etc, etc, etc ? And Europe is no better.

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